Always be Owing

[Nashville]

To the extent that my clients can control it, I always advise them to NEVER have a refund. Do you run the risk of penalties? Sometimes. When there are overpayments, I advise them to apply to the next years' estimated taxes. This is especially effective with states, after reading a post that New York is impossible to get through. The same is true with Virginia and Pennsylvania.

1. (Minor) Takes the anxiety away from a client anticipating a check.
2. (Minor) Most of the refunds do not come in time to enjoy it before an estimated payment is due.
3. (Major) Does not give the gubbermint a chance to OFFSET the refund.
4. (Major) You can get the attention from the Dept or Revenue, whereas you CAN'T if they owe you money.

[JohnH]

Absolutely - right on target.
The ideal return owes $999 to the IRS, if everything is planned exactly right.

[OtisMozzetti]

borrowing $999 from the IRS

...
The ideal return owes $999 to the IRS, if everything is planned exactly right.

Is it wise to cut it that close, and to put that much effort into planning everything exactly right?

EA in California

[JohnH]

I was streching to the ideal. Actually, I'm OK with anything between $500 and $3,000 due to IRS under ordinary circumstances. The estimated tax penalty on $3K (if applicable) is a pittance compared with the cost of the work necessary to get it any closer (unless the client is on a fixed income and there are no significant variables)

[JoshinNC]

My goal is -$1000

If I can keep the client's balance between $0 and $1000 I've done my job.

[Roberts]

Saw a stat back in 2009 that 70% of American households lived paycheck to paycheck and if they were unemployed for more than 3 weeks, they would begin missing housing payments. Handing them a tax bill for $1,000 that could have been budgeted seems like a horrific preference for most Americans. What are the odds that bill is ending up being put on a credit card at 18% interest for a few of your clients or they put off making retirement contributions to meet the bill?

On a $5,000 refund the client could have potentially saved $96.16 per week. If they saved 100% of that money in a money market account earning 1% (good luck finding that account), they could have earned interest of $24 which is reduced by taxes. How much did you bill your client in tax planning fees so that they could earn that $24 windfall?

[JoshinNC]

I'm not sure which side of the fence you are riding?

Saw a stat back in 2009 that 70% of American households lived paycheck to paycheck and if they were unemployed for more than 3 weeks, they would begin missing housing payments. Handing them a tax bill for $1,000 that could have been budgeted seems like a horrific preference for most Americans. What are the odds that bill is ending up being put on a credit card at 18% interest for a few of your clients or they put off making retirement contributions to meet the bill?

On a $5,000 refund the client could have potentially saved $96.16 per week. If they saved 100% of that money in a money market account earning 1% (good luck finding that account), they could have earned interest of $24 which is reduced by taxes. How much did you bill your client in tax planning fees so that they could earn that $24 windfall?

Are you advocating to tell clients to overwithhold wildly to avoid even the potential for a balance due? Or, to do a good deal of tax planning, at $125 p/hr, to save them $5 in underpayment penalties?

[JohnH]

Josh said it well.

I think we have to clarify what type of client we are advising here. If they are living paycheck-to-paycheck, they aren't likely to be doing much tax planning. In that case, just tell 'em to underwithhold so they can count on a windfall in the IRS no-interest-savings account at tax time. As Roberts pointed out, the interest foregone isn't a big deal if it keeps them from owing at year-end, They don't need a budget-buster hitting them at tax filing time.

But presumably anyone who is paying for tax planning advice isn't living paycheck-to-paycheck. Usually they are a business owner, investor, or someone else who has some financial flexibility. Their tax liablity varies from year-to-year, maybe even from quarter-to-quarter. Those people have an entirely different mind set, they should know the score when it comes to financial management, and they appreciate sound advice. I always tell these folks that if they don't owe the IRS at tax filing time, I didn't do my job right.

[Roberts]

I have plenty of tax clients and investment clients who are living paycheck to paycheck. It's interesting that you think small business owners are all flush with cash. That's contrary to all of my experience. It's been my experience that small business owners are the most cash strapped individuals in the market because they are so invested in their companies. But hey, I guess that's not the case anywhere else in the country.

[JohnH]

I have plenty of tax clients and investment clients who are living paycheck to paycheck. It's interesting that you think small business owners are all flush with cash. That's contrary to all of my experience. It's been my experience that small business owners are the most cash strapped individuals in the market because they are so invested in their companies. But hey, I guess that's not the case anywhere else in the country.

We all have clients who fall into both categories. But it's my experience that the ones living paycheck-to-paycheck (regardless of income) don't spend much time or money doing financial planning, tax planning, or any type of planning. In fact, that's the main reason they are living paycheck-to-paycheck.

I admit that sounds critical, harsh, uncaring, and judgemental. But for the most part it's the truth.

[taxea]

I try to adjust the W-4 so the refund is 300 to 500.

[JohnH]

No thanks. I'll be going somewhere else to get my estimates done.

[AJsTax]

I disagree

No thanks. I'll be going somewhere else to get my estimates done.

I understand the reasoning behind your methods and try to come as close as possible to breaking even on my own return, BUT MOST of my clients tell me to figure their estimated vouchers "just so I don't owe at tax time." They understand the error of loaning a bunch of money to the government all year, but don't want a balance due return either. And I believe Robert's comment was leading to the fact that in today's market, even a $5000 refund did not cost them very much in lost revenue if saved and invested. For many that is their only savings account.
If my SB and SE clients end up owing more than a couple hundred (if their income projections were close) then I have failed in my duty. It is a whole lot easier to pay it every month or payday than to come up with a bunch at tax time.

[AZ-Tax]

Possibly none of you preparers had this happen to your clients?

Possibly none of you preparers had this happen to your clients? I had a handful of owing clients over the last 5 years for which the checks they issued to the IRS, were credited to another taxpayer and if you think faxing or mailing them a cancelled check would take of it, think again. In almost all cases my clients had to visit their local IRS office. From that point forward I encourage all my clients who were always paying in to w/h a little more so they receive a little refund.

[FEDUKE404]

Why write all those checks?

Possibly none of you preparers had this happen to your clients? I had a handful of owing clients over the last 5 years for which the checks they issued to the IRS, were credited to another taxpayer and if you think faxing or mailing them a cancelled check would take of it, think again. In almost all cases my clients had to visit their local IRS office. From that point forward I encourage all my clients who were always paying in to w/h a little more so they receive a little refund.

That check problem is easily solved by establishing, at the time of efiling, a payment to the IRS/state.

So far as I can recall, I don't believe I have had a client write a paper check for a IRS/state balance due in a very long time. Many also make their upcoming federal estimated payments by automatic debit. A very few prefer paper checks/coupons for estimates because their income/deductions are all over the place as the year progresses.

As for the original thread topic, I've found many clients literally fear owing the IRS anything!! For those clients they sleep better at night NOT modifying their withholding and each year receiving refunds. That is clearly their choice, and I respect it.

On the flip side, I have worked with clients who owed very large balances due BUT they knew such was on the horizon and with knowledge of the Form 2210 rules they could settle up at tax time with zero underpayment penalties. Of course, that was more relevant when bank interest rates exceeded 1%.

FE